Unintended consequences

A recurrent theme in this blog is that government regulation almost always has unintended (negative)  consequences. The latest example is the shortage in generic cancer drugs. These drugs are off-patent, so they should be cheap. But lately, many have become unavailable.

The reason is government regulation, specifically Medicare price controls, according to Ezekiel Emanuel (Rahm’s brother). In a 2003 law, government agreed to pay oncology doctors the ‘average selling price’ of cancer drugs they prescribe, plus a 6% overhead, rather than allow a classic fee for service. As the rules are set out by law, prices can only rise 6% every 6 months.

I am guessing the rule was written to prevent ‘excess profits’ by evil drug companies jacking up the price of a successful drug. But in their infinite wisdom, our governmental overlords overlooked that when a drug goes off patent, its price drops a lot, as much as 90%. As other manufacturers start making the generic drug, the price often fluctuates a lot as the market finds its new balance as the original and generic manufacturers figure out whether they can make and sell it profitably. The regulators cannot keep up with real-time conditions in the marketplace and (apparently quite frequently) the price can get stuck at a point too low to incentivize enough production to meet demand.

Amazingly, Emanuel sees government regulation as the answer:

One solution would be to amend the 2003 act to increase the amount Medicare pays for generic cancer drugs to the average selling price plus, say, 30 percent, after the drugs have been generic for three years. 

As if his proposed fix doesn’t have more unintended consequences lurking in possible scenarios that no one has yet imagined.

When will these folks lose their arrogance and realize that government regulations will never be smart enough to create the utopia they want to force upon us ?

Hat tip Megan McArdle.


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